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The Money Making Game #12: The Social Network

We certainly have no problem getting caught up in the fun of playing games, but the people who create them have their pocketbooks to worry about, too. In this column, finance expert and GameSpy contributor Chris Morris guides you through the tricky corridors the gaming industry's financial side, touching on big-time business decisions and how they matter to the common gamer.

Small Games Are Big Deals

Not too long ago, publishers tended to turn their noses up at social games. Mafia Wars? Poker? Sure, they were mild distractions to entertain people in-between status updates... but a viable economic force? No way! Then FarmVille took off -- and the bubble began growing. Big-name developers and executives began defecting. And publishers began investing. Flash-forward to today: No one's foolish enough to say social (or mobile) games are going to replace console releases anytime in the foreseeable future, but at the same time, no one's foolish enough to consider the field an afterthought anymore, either.

Electronic Arts, of course, is the biggest publisher to immerse itself in the social network gaming waters. Between its 2009 acquisition of Playfish (which consisted of a $300 million offer with an additional $100 million earnout) and its buyout of PopCap earlier this year (for $750 million and additional earnouts that could ultimately push the price over $1 billion), EA's not taking the new casual gaming movement lightly.

In fact, between those acquisitions and the launch of The Sims Social on Facebook, the company has propelled itself to the number two spot among social games companies, boasting nearly 83 million monthly active users (a number that's growing fast), according to AppData. That's still less than one-third of what Zynga boasts -- but it's an inroad.

Other publishers are taking things a bit slower when it comes to the social world. Activision representatives last week claimed that the company isn't ignoring social (and mobile), but rather moving in a deliberate, methodical method, looking to avoid overspending on the space (a subtle stab at EA) while figuring out how best to capitalize on the market.

"To date, we've mostly [explored social and mobile] around our existing franchises," said Activision CFO Thomas Tippl at the recent Citi 2011 Tech Conference. "In the future, you will see more activity on our part to broaden our social and mobile parts of the portfolio. But it's going to be done in a thoughtful, methodical way, and in a way that will tend to create value for our shareholders, as opposed to venture capitalists and private equity firms [that are contributing to] what I would call call a bubble valuation."

Take-Two Interactive, meanwhile, has been exploring the social space cautiously as well -- but made a fairly big splash in July with the launch of Sid Meier's CivWorld. The game's not exactly tearing up the charts, though; it currently has just over 216,000 monthly average users, but the trends aren't good. The average number of players has dropped steadily for the past month.

Publishers, of course, follow the numbers: They prefer following the ones with dollar signs in front of them, but when you gather enough players in one spot, they tend to head in that direction also. That's why the move to social games is taking on an increasing level of urgency.

Publishers are like cruise liners, though. No major movement happens quickly -- and that sometimes leads to a lot of people abandoning ship. If you look at the number of key executives in this industry who have eschewed the packaged-goods business for social/mobile games companies, it's astonishing. Peter Dille, former senior VP of marketing for Sony's PlayStation division, is the latest high profile convert. He signed on with Tapjoy earlier this month.

"I've had a chance to decompress, and it's clear that so much is happening in mobile and social games," Dille told VentureBeat at the time.

Zynga, meanwhile, has snagged a gaggle of people from EA, including chief operating officer John Schappert, senior VP Steve Chiang (who oversaw the Madden series), and executive VP Jeff Karp. Executives jumping the fence aren't as sexy as big-name developers (though plenty of those are working on social games these days, too)... but they are, in a way, more notable.

When the industry leaders move, it's a good sign that they're following the money -- and when money's on the table, that's when publishers start rethinking strategies. Social games, of course, won't replace the profits of AAA games anytime soon; that's pretty obvious. But as the casual segment of the audience moves more and more toward them, rather than the low-cost titles that are often churned out at this point in the console cycle, the gaming industry is being forced to rethink its older strategies.

Even core gamers are going to feel the squeeze -- research and development is an expensive part of the gaming world. And once publishers find a way to dramatically monetize social/mobile gaming, which carries much lower costs, PC- and console-based developers could find it a lot harder to convince publishers to fund outside-of-the-box ideas. That might mean the next great thing either never manages to break through -- or does so in a gaming arena that the core gaming audience isn't watching right now.

Chris Morris has covered the video game industry since 1996, offering analysis of news and trends, and breaking several major stories, including the existence of the Game Boy Advance and the first details on Half-Life 2.

Spy Guy says: Sorry, no time to read this, gotta play FarmVille. Are you a social gamer? What do you think of the trending focus toward less-hardcore games?